John Young, arguably NASA’s most accomplished astronaut, once said:
“The greatest enemy of progress is the illusion of knowledge.”
An engineer and test pilot, he knew of which he spoke. In aerospace, we test and test again. We test to the point of failure and beyond. We don’t just beta test. We break stuff, and sometimes we break more than that. It’s how we learn. That’s how we move forward. It’s how we progress and succeed. When investors and founders talk of failing fast and learning quickly, they are bang on the button. And in aerospace, we live by this rule.
Along with two of my personal favourites, “it depends” and “what if”.
Let’s start with the latter, “what if.”
Regulators and manufacturers must consistently ask themselves, “what if this fails?” As potential long-term investors, we should ask, if one rotor fails, what next? How many rotors need to fail for it to be a catastrophic failure? We should never accept “It will never happen.” Because in aerospace it will, and a million other things besides. Which leads us to the former statement, “it depends.”
I like this response because it shows a designer has thought through the consequences of varying situations. As a new captain, I was once in a briefing room with my peers, when the Chief Pilot asked the group, “what would you do if a hydraulic system fails halfway across Siberia?” The right answer is… it depends. It depends on weather, at airfields en route, conditions at destination, fuel burn increased by the fault, what happens if there’s another fault, it depends.
If we want to succeed in the many projects of the next era of aerospace, we must listen to Young’s words from beyond the grave. We cannot assume anything, and we cannot opt for shortcuts and accept received wisdom. And we need to think, “what if?”, and “it depends.”
Investors must exercise patience. They should seek to reward the pioneers, and work with those visionaries who have the mindset to follow in John Young’s footsteps (which you can still find among the Descartes Highlands on the surface of the moon). All backed up with solid testing and an acceptance of failure. We aim to help investors in the space by asking “what if” questions, and helping them think on “it depends”?
We’re not building dating apps. This is about building hardware that actually does stuff, stuff that carries people and freight. We aim to test and break things, so we can reduce the chances of it happening when our lives or others may depend on it.
So, when we’re looking at the potential investments in the next phase of aerospace, we’re looking for that mindset. It’s worked for Elon Musk and SpaceX, it will work for many others. For those who ignore Young’s words, permanent failure awaits.
Right now, there are a few contenders in the race for advanced aerial mobility (AAM), previously known as urban air mobility (UAM). Each vehicle is at a different stage of development. Some are flying, some not. Some are approaching certification, some are years away.
We should be clear, certification is the most significant milestone in a long journey to market for the original equipment manufacturers (OEM). Without clearance from the regulators, the vehicles will never see commercial service. They will be expensive pieces of industrial sculpture.
Contrary to popular opinion, regulators don’t want to hold back progress or see projects fail. What they are looking for are methods and plans to comply with rules that have, in the most part, come about through hard lessons. So when a rule says we need 30 mins of reserve fuel at an alternate airfield, that’s because someone, somewhere in the past didn’t; and the consequences are now part of aerospace knowledge and experience.
In the AAM universe, global regulators have been working closely with some OEMs. Notably JOBY in the US, EVTL and EVE in the UK and Brazil, and LILM in the EU. This is hugely promising, as it reduces the chances of the OEMs launching down blind alleys.
While testing and failure are necessary elements of aerospace development, they incur costs (even if they prevent larger costs later on). In today’s news cycle, they can have PR penalties if not properly handled.
From a commercial sense, aerospace has different levels of risk and return, and each has to work in order for a aerospace project as a complete success.
From an investment perspective, when we look at new aerospace projects, we are looking for some specific features.
The problem/market hypothesis.
Is the shiny new thing fixing or helping reduce a problem? And if it fixes the problem, is that problem an engineering curiosity or genuine commercial need?
Aerospace and aviation is full of grand projects that have failed commercially, often because the engineering overtook business sense.
One need only look at the A380 and B787 programmes for evidence of what we mean. Those same lessons would also apply to the AAM universe. The A380 programme was a hugely successful project from an engineering perspective, and yet despite that, it was clearly a commercial failure. The B787 has arguably been less successful looking from an engineering or manufacturing context, but still has the potential and industry support to be a profitable project.
So what can we learn from these two projects, and can we apply them to the new world of AAM?
Testing until failure
Let’s remind ourselves of some sage words from a man who knew a few things about aviation, RJ Mitchell, designer of the Spitfire.
“If anyone ever tells you anything about an aeroplane which is so bloody complicated you can’t understand it, take it from me: it’s all balls.”
When you combine Mitchell’s straightforward approach with Young’s no nonsense testing, you get something that looks like:
Test something until it breaks, learn the simple truth behind the failure, adjust and try again.
As a new student pilot, my instructor was one of those gifted pilots who flew jets onto the Royal Navy’s original (and tiny) carriers. He said, “All you need to know about flying is-CCHAT. Change, Check, Hold, Adjust, Trim.” It’s exactly the same as the statement in bold above. As we get closer to the operational and commercial reality of AAM, we will see a lot of testing, a lot of failure, and discovery. We need to accept this. As investors, we should look for an acceptance of failure. In that way, we know that the companies we are examining are pushing towards knowledge and experience.
Do not invest in aerospace companies that do not see the value in testing. In fact, do not invest in aerospace companies that don’t heed the words of Young and Mitchell.
So, let’s go back to Airbus and Boeing and their multi-billion dollar calls on the A380 and B787 projects. Essentially, they came from different world views, mixed with a healthy dose of politics and national pride.
Travelling to Toulouse in the 1980s and early 90s, one could see that there was an obvious gap in the Airbus fleet, compared to Boeing. The Boeing 747 had held the world’s imagination as the ultimate passenger jet, Airbus’s A300 series, while revolutionary didn’t come close to the capabilities of the B747, and its bigger sisters, the A330 and A340, were direct competitors to the B767, DC10/MD11 and the venerable Tristar.
The A380 project filled that gap, while also launching a Pan-European engineering and manufacturing, widely supported by the European industrial/political bureaucracy. The commercial justification was a 15% direct operating cost saving over the B747-400, largely based on newer technologies including fly-by-wire, material and weight savings. Arguably, the A380 achieved this and more (even if the economics of aircraft are subject to many manipulations). The real argument for the enormous development cost of the program ($30 billion plus) was a worldview that saw an airline industry dominated by travel via slot constrained mega-hubs. In the end, it worked as a business model, but unfortunately for Airbus, it only worked for one airline, Emirates.
Airbus 10 yr Stock Price with Moving Averages
At Boeing, a different story was developing. With the B747 series nicely bundled away, Boeing seemed comfortable with the large aircraft market, eventually leading to the derivative B748. Rather than build a new very large airliner, Boeing focused on efficiency and point-to-point transport, launching the B787 program, which stems from many technologies envisaged by its Sonic Cruiser concept. So the B787 has an exceptional wing, a groundbreaking electric air conditioning system, and fragile but efficient engines. So far, the B787 program has been a reasonable success compared to the A380 program. It has far more airline customers, financiers like it, as they see it as “right sized” (correct payload, range, costs etc). From an engineering perspective, the story is more nuanced, as it has suffered significant operational setbacks, with the Rolls Royce Trent experiencing fatigue and power loss fault (not ideal in an ETOPS aircraft).
Boeing 10yr Stock Price with Moving Averages
The point behind this brief history of recent aviation history is this. It’s very difficult to predict how an aerospace project will evolve. It’s also near impossible to foresee how it will end up as a business case. But testing, checking, evaluation and learning from our experiences will give more insight than assumptions, received wisdom, group thinking or just blind faith.
“Change, Check, Hold, Adjust, Trim.”
The JOBY accident
On Feb 16th 2022, just before 10 am local time, JOBY Aero suffered a hull loss of one of its prototypes. Suffering what the NTSB described as a significant component failure, the unmanned aircraft appears to have been flying beyond its maximum design speed. In principle, this type of testing is not unusual in flight testing. The entire flight envelope needs to be established. All likely structural loads must be forecast and exceeded, components tested to limits and beyond, including in JOBY’s case its electric rotor power plants.
While any accident in flight testing is a setback initially (thankfully, this aircraft was unmanned), there is always an opportunity to learn from the data released. JOBY appears to be doing the right things, but we wait for the full NTSB report with interest.
JOBY Stock Price with Moving Averages
LILM and the short selling note
Lilium’s stock price and credibility suffered a significant setback last month when Iceberg Research issued a damning report into its processes and technologies. See here:
and that first report had a successive report from Iceberg here:
https://iceberg-research.com/2022/03/17/battery-claims-how-lilium-takes-its-investors-for-a-ride/
We won’t comment on some of the more litigious comments made by Iceberg. Our readers can make their own minds about that. So we will focus on operational and development issues. Most of Iceberg’s concerns revolve around LILM’s higher battery density requirements derived from LILM’s higher disc loading design.
LILM Stock Price and Moving Averages
Here’s what we want to see from LILM at this stage. A full and repetitive set of transitions from hover flights. We need greater visibility of the battery technologies on which LILM is basing its designs and operational forecasts. And then all that needs testing. Testing will have unforeseen obstacles. That’s par for the course.
At the time of writing this article, LILM moved its testing programme to Spain. We will watch its progress with great interest.
Industry wide issues
We need to see solutions to the pilot shortage problem. All AAM business models and forecasts are based on high utilisation rates. In the first generation of the industry (except for China’s Ehang EH) to be profitable, all of the OEM plans will require pilot/operators (and lots of them).
This coming from a backdrop of the traditional airline industry seeing widespread pilot liquidity issues. Often described as a potential “shortage”, the truth is more nuanced than this simplistic term, and will be the subject of a future research note.
AAM will require thousands, if not tens of thousands, of skilled operators to achieve the high utilisation that will make it a profitable exercise.
Except for some relatively lightweight memorandums, this problem is not being addressed.
We need solutions on UTM. Including compatibility with current and future ATMs, including inbuilt and reliable cyber security, to prevent the vehicles from becoming simply weapons.
These are just some of the many hoops the industry needs to leap through. All will require smart and patient investors.
Listed AAM Stock Prices 2 yrs
As always, we’d like to thank Sentieo for their data services in preparing this note. You can find out more about their services at:
Disclaimer
Nothing in this newsletter constitutes investment advice. It is an opinion piece constructed by the author and is not an offer or inducement to buy or sell securities.